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December 13, 2012

Look beyond the words of restrictive covenants

  • The context and circumstances of your covenants can influence their interpretation.
    • By LARRY COSTICH and MILT REIMERS
    Schwabe, Williamson & Wyatt

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    Costich

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    Reimers

    The interpretation of restrictive covenants can depend upon the context and circumstances of the property to which they apply.

    Property owners and prospective buyers should analyze covenants through this lens in order to fully appreciate the restrictions and exposure associated with the covenants. Developers and community associations must similarly consider the context and circumstances in order to create restrictive covenants that will impose appropriate restrictions on the properties, but also provide adequate flexibility for the affected property owners to adapt as conditions change.

    A restrictive covenant imposes a legal obligation on a property owner to either perform or refrain from performing certain actions. Such covenants “run with the land,” meaning that the transfer of the property from owner to owner does not extinguish the covenant.

    In Washington state, covenants are interpreted like any contract, including the consideration of the parties’ intent. Washington courts apply the “context rule” of contract interpretation in ascertaining the parties’ intent — meaning courts may take into account the context and circumstances leading to the adoption of covenants and the subsequent conduct of the parties.

    For example, the Washington State Court of Appeals held in 2012 that a homeowners’ association located within the San Juan Islands has the authority to operate a marina even though the association’s governing documents did not explicitly mention the word “marina.” In reaching its decision in Roats v. Blakely Island Maintenance Commission, the court considered the context and circumstances of the covenants, noting that the community is on an island, accessible only by boat or airplane and not serviced by public ferries.

    The court determined that, under the broad authority of the covenants, the association can operate the marina with the approval of its members.

    The court of appeals has applied similar analysis to the property assessments associated with repairing a jetty. In Lagoon Point Improvement Club v. Herschel Freeman, the court held that an assessment to pay for jetty repair, though not expressly authorized in the association’s governing documents, is “foreseeable” and within the association’s scope of authority under its covenants. The court noted that the development’s location on Lagoon Point on Whidbey Island, including and surrounding Lagoon Lake, demonstrates the significance of water access to the development’s overall plan.

    These recent Washington cases highlight the importance of context, circumstances and foreseeability when interpreting restrictive covenants and the future burdens that could be imposed on property. Both decisions upheld actions taken by a community association that the association had not previously taken before. In both cases the property owners were compelled to take on increased obligations and liabilities than originally had been the case when they acquired the property.

    The implications of these cases provide forewarning to property owners to look well beyond a narrow interpretation of restrictive covenants and to examine the environment in which the property is situated. Prospective buyers or owners of residential property in a resort community could assume greater financial responsibilities and significant obligations for the operation and management of the resort and related recreational activities.

    For instance, communities developed around golf courses increasingly face a Hobson’s choice dilemma. As the popularity and financial viability of golf courses decrease, the surrounding community associations and individual property owners are confronted with the prospect of acquiring the golf course in order to preserve residential property values and protect against undesirable development (from the homeowners’ point of view).

    These owners may find their community associations creating for-profit subsidiaries to manage the resort and protect property investments. Given the setting of the property, such an expansion could be viewed as “foreseeable.” By for many within the community, taking on these added obligations would likely be preferable to the alternative of allowing the resort property to degrade or be developed, as well as the loss of an attractive amenity.

    In an effort to avoid any dispute over the interpretation of such restrictive covenants, the drafting of such covenants should command thoughtfulness and precision. In some instances, one may want to draft covenants with very rigid and unequivocal restrictions. In other instances, one may want to draft covenants which allow the property owners to adapt as conditions change.

    Developers in particular may wish to provide greater flexibility in the governance of the community to protect investments and the legacy of the development, yet offer options for the development scheme. Drafters must pay particular attention to the definition of terms and the scope of the restrictive covenants, and always consider the context and circumstances of the covenants, including, for example, the location of the property, access to the property and the lifestyle of the membership.

    Larry Costich and Milt Reimers are land use attorneys at Schwabe, Williamson & Wyatt in Seattle.


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